RDR trail commission rules may create more orphaned clients

Concerns are mounting over the number of orphaned clients post-RDR after the FSA said a customer’s new adviser could inherit their existing trail commission.

Advisers say they may be forced to end the relationship if the client is unwilling to pay a supplementary adviser charge on top of the inherited legacy trail.

An additional charge may be necessary if, after discussing the client’s circumstances, the renewal income fails to cover the ongoing work required.

In its latest quarterly consultation paper (QCP), the FSA said after 2012 advisers will be permitted to re-register a new client’s legacy trail commission, but must provide an ongoing service in return.

Sam Caunt, partner at Kingston PTM, said: “Some clients will say they are unprepared to pay more than they have been doing, and then where will they go? The banks?”

Peter Lawrence, principal at Prime Time Financial, added: “I can see a scenario where I may have to tell the client I can not service them for what they are paying, or are willing to pay.”

Advisers faced with the scenario of having to supplement their income have two options, according to Aegon UK sales director Duncan Jarrett: charge a fee or amend the terms of the existing policy.

But while clients may be unprepared to accept the first option, he said providers will almost certainly be unable to process the second.

“Amending policies that have been in force for years would be extremely difficult because commission has already been disclosed, the charging structures are in place and the provider’s systems are running,” he said. “All three would have to change.”

However, Martin Bamford, managing director of Informed Choice, said he expects most clients will be happy paying extra for a service they may not have received at all under their previous adviser.

“We already operate a system like this for new clients and we have found they are quite receptive to it,” he said.

“But I would say advisers should make sure they have that conversation before they apply for the transfer of trail.”

In its QCP, the regulator clarified two post-2012 scenarios under its adviser charging rules. Firstly, it said advisers can continue to receive trail commission on legacy business written prior to 2012, in accordance with the contractual terms already in place.

Secondly, when a client moves to a new adviser, it said the intermediary can apply for the re-registration of any trail commission if the original contract permitted it.

In further clarification made to Professional Adviser, the FSA said it would then have “no objection” if advisers levied a supplementary charge on top of the trail commission.